AIG In Crisis

Skittish about further losses in the financial industry, investors hammered shares of AIG, the beleaguered insurance company. With Lehman Brothers running out of options this week, investors fear that AIG will be the next shoe to drop.

That's because the insurance giant faces billions in additional losses tied to policies that guarantee complex financial instruments which are, in turn, tied to home loans, whose values have plummeted.

After hours, CNBC learned that AIG has hired JP Morgan to advise on raising new capital, says CNBC's Charlie Gasparino. The plan is likely to be announced over the week-end. One of the names in the mix is Blackstone , says Gasparino, and BlackRock may be involved as well.

Also after hours Standard & Poor's Ratings Services put AIG on CreditWatch with negative implications. S&P said the action follows a "significant" decline in AIG's share price and an increase in credit spreads on the company's debt.

Like other insurers, AIG has been hit hard by deterioration in the credit markets amid concerns that complex, structured investments it insures will increasingly default. Investors remain concerned about whether the New York-based insurer has adequate capital reserves.

They need another $13 billion to avoid the downgrade, explains Tim Seymour.

I own AIG puts, adds Joe Terranova. I'm one of those investors who doesn't know how they will raise the capital they need.

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Outrage Over CreditWatch

On a related note, the traders are outraged that S&P put AIG on CreditWatch, which effectively makes the cost of borrowing money go up.

“The reason companies such as AIG were able to accumulate such exposure to the housing market is because they were able to get the stamp of approval from rating agencies such as S&P, saying they were safe. Now it turns out, clearly, those bonds were not safe,” explains an aggrevated Dylan Ratigan.

“Certainly Moody’s was not helpful," adds Sanford Bernstein analyst Brad Hintz. “My read on this thing is what had been a credit crisis associated with mortgages has now become a credit crisis associated with a slowing economy,” he says .

“What that leads to, is a crisis of confidence in the equity markets. Investors are fleeing the stocks for fear of dilution. But those who have funding capability should be able to live through this.”

What do you think? Tell us now.

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